If you work from home, you should consider deducting your home office expenses. However, to deduct home office space, you must meet certain requirements.
Employees must use your home office for your employer’s convenience, not just your own. Self-employed individuals generally must use your home office as your principal place of business, though there are exceptions.
Both employees and self-employed individuals must use the home office regularly (not just occasionally) and exclusively for business purposes. For example, if you use your home office as a guest bedroom or you watch TV there, you can’t deduct the expenses associated with that space.
A valuable break
If you meet the eligibility requirements, the home office deduction can provide you with a valuable tax break. The home office deduction may allow you to deduct a portion of your mortgage interest, property taxes, insurance, utilities and certain other expenses, as well as the depreciation allocable to the office space.
If you do not want to track your expenses, you can take the simpler “safe harbor” deduction in lieu of calculating, allocating and substantiating actual expenses. The safe harbor deduction is calculated based on $5 per square foot, with a maximum deduction of $1,500.
Self-employed individuals can deduct eligible home office expenses against your self-employment income. This may allow you to convert otherwise nondeductible personal expenses into business expenses, convert itemized deductions into above the line tax deductions, and convert deductions that are alternative minimum tax (AMT) adjustments into deductions that are not AMT adjustments. The deduction will lower the taxpayer’s income tax, self-employment tax and state taxes.
Since employees deduct the home office expenses as miscellaneous itemized deductions, they may find that they have limited benefits:
- The deduction must exceed 2% of your adjusted gross income;
- The deduction is subject to the itemized deduction phase-out for high income taxpayers; and
- The deduction is an AMT adjustment. Also, you may not receive any state tax benefit for the deduction.
Finally, be aware that we’ve covered only a few of the rules and limits here. If you think you may be eligible for the home office deduction, contact me at email@example.com or your Berdon advisor.
Hal Zemel, a Tax Principal at Berdon LLP, has more than 20 years in public accounting and advises businesses in the real estate, service, and manufacturing sectors.